Down round is funding at lower valuation than previous round. Example: Series A at ₹100cr, Series B at ₹80cr = down round. Causes: Missed targets, market crash, overhyped early valuation. Painful for founders (massive dilution) but sometimes necessary to survive.
Down round dynamics: Previous round: Series A at ₹100cr valuation, raised ₹20cr. Down round: Series B at ₹80cr valuation, raise ₹30cr. Impact: Founders diluted massively (investor protection kicks in), Early investors invoke anti-dilution rights (full ratchet or weighted average—get more shares to maintain value), Employee stock options underwater (options at ₹100cr strike price, company worth ₹80cr—worthless). Causes: Missed growth targets (projected ₹5cr ARR, only hit ₹2cr), Market crash (2022-2023 tech winter—valuations dropped 50-70%), Overvalued early round (2021 bubble—raised at 100x ARR, unsustainable), Poor execution (burned cash, didn't reach milestones). Down round consequences: Founder dilution (might drop from 30% → 10% after down round + anti-dilution), Morale hit (team sees company "failing," options worthless), Harder future fundraising (stigma of down round), Media attention (TechCrunch writes about it—bad PR). When to take down round: Out of cash (3 months runway, can't raise at old valuation), Alternative is death (down round > shut down), Bridge to profitability (raise ₹5cr at lower valuation, get to cashflow positive). When to avoid: Can bootstrap to profitability (better than bad deal), Can raise from non-dilutive sources (venture debt, customers, grants). Recovery: Down rounds aren't death sentence. Many successful companies had down rounds: Twitter (had down round in 2008, recovered to $30B+ exit), Square (down round pre-IPO, still IPO'd at $3B+). Key: Survive, execute, grow into valuation.
Down Round = New Valuation < Previous Valuation. Dilution Impact = Old Ownership % × (Old Valuation ÷ New Valuation)Peak: $47B valuation (2019). Attempted IPO failed, fundamentals exposed. Down round: $8B (83% down). More down rounds → eventually $9B SPAC (recovered slightly but massive from peak).
Raised at $3.9B (2018). Down round in 2020: $3B valuation. Recovered: IPO at $8B (2021). Down rounds temporary if execution improves.
Series A: ₹100cr, owned 60%. Missed targets. Series B down round: ₹60cr. Anti-dilution kicks in, raised ₹20cr → diluted to 30%. Painful but company survived.
Down rounds are painful but not fatal. Survival > valuation. Better to raise ₹10cr at 50% down to extend runway than shut down. Many billion-dollar exits had down rounds. But: Try to avoid by hitting milestones, keeping burn low, raising before desperation. Down rounds from weak position = bad terms (huge dilution, investor control).
Bull market (2020-2021): <5% of rounds. Bear market (2022-2023): 20-30% of rounds. Always cyclical—happens when valuations reset.
Hit growth targets (deliver what you pitched), Keep burn low (18+ months runway always), Don't overprice early rounds (leave room to grow), Raise before desperate (6-12 months out).
Stock options underwater (strike price > current valuation—worthless). Companies often reprice options lower or issue new grants to retain talent. Otherwise mass exodus.
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